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Remarks by Secretary Paulson on Managing Complexity and Establishing New Habits of Cooperation in U.S.-China Economic Relations at the 2007 George Bush China-U.S. Relations Conference

10-23-2007

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October 23, 2007
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Washington, DC--Good morning, General Scowcroft, Vice President Li, President Davis and Ambassador Popadiuk. I appreciate the opportunity to be here at the Third George Bush China-U.S. Relations Conference.

This room is filled with the very best of China expertise and experience from both sides of the Pacific. I applaud your commitment to this bilateral relationship. And of course, there is no better example of this than former President Bush – who has long been a stalwart advocate of advancing U.S.-China ties.

I have devoted much of my professional life – and far too many hours on planes – to learning about and increasing U.S. commercial ties with the People's Republic of China. Now, as Treasury Secretary, I would like to share my thoughts with you on the future of the U.S.-China economic relationship.

New Global Realities and Emerging Bilateral Challenges

China's re-emergence on the global stage is one of the most consequential geopolitical events of recent times. China's global influence is expanding. A cooperative, constructive and candid U.S.-China relationship is central to understanding and responding to China's re-emergence, in all its possible manifestations. The United States must manage our disagreements with China, foster greater bilateral cooperation and improve our ability to work constructively with China across all dimensions of national power.

There is hardly an issue – from trade, to national security, to climate change – or a place – from North Korea to Iran to Sudan – where American and Chinese interests do not increasingly overlap. Because China is now integrated into the global economy, what happens in China's economy affects the entire international community. The U.S.-China relationship has become central not only to each nation's interests, but also to the maintenance of a stable, secure and prosperous global system – which benefits the world.

My focus at Treasury is on the U.S.-China economic relationship, which is a core element of our overall bilateral ties. Yet, the tectonic plates of the U.S.-China economic relationship are shifting. This demands new visions from our leaders and new mechanisms from our governments.

First, U.S.-China economic interdependence is deepening. We need each other more and on a broader number of economic and economically consequential issues. Over the past five years, U.S. exports to China have grown at five times the pace of U.S. exports to the rest of the world, and China has become our fourth largest export market.

Exports to China benefit American businesses by providing new market opportunities for American products and services. Imports from China continue to benefit the American economy and the American consumer by providing an increased diversity of products at lower prices. Imports from China also raise challenges, as I will discuss in a moment. Just as competition from trade with China pushes our industries to stay on the cutting edge, competition will also speed China's development as a more market-oriented and balanced economy.

Moreover, the United States and China are shaping, and being shaped by, global energy and environmental trends, which have strong economic consequences. Our countries are the world's largest energy consumers and the largest emitters of greenhouse gases. What happens with China's environment impacts all nations; air and water know no boundaries.

These trends create challenges that can not be resolved by the United States or China alone. They certainly can not be solved without China at the table.

Second, whereas trade and investment were once largely a source of stability in bilateral relations, they are now increasingly also a source of tension. Such tensions are straining our domestic consensus on the benefits of economic engagement.

America's large corporations – the longtime proponents of bilateral engagement – as well as America's smaller businesses – who are finding new markets in China – increasingly are concerned about the openness of China's economy, and Chinese counterfeiting of trademarks and pirating of intellectual property. Some American workers believe the field of competition is uneven and unfair. Also, American consumers have very real concerns about the safety of food and product imports from China.

These anxieties manifest themselves in several ways, which leads me to the third dynamic confronting us: the rise of economic nationalism and protectionism in both our nations. These sentiments may constrain leaders from adopting policies that are in the long-term interests of the citizens and economies of the United States and China. Such views also obscure each nation's ability to assess the others' long-term intentions.

In responding to globalization, policymakers in both countries must resist the impulse to discard the hard-fought and long-term gains of open economies by pursuing short-term and misguided policy responses. I am committed to working to maintain an open trade and investment climate in America and to working to open markets in China to greater competition from American goods and services.

These three emerging dynamics to our economic relationship – deepening interdependence, a strained policy consensus, and the rise of economic protectionism – are mutual and require cooperative solutions.

Managing Complexity and Establishing New Habits of Cooperation

These dynamics informed the creation of the Strategic Economic Dialogue (SED) by President Bush and President Hu Jintao in 2006. They envisioned a forum to allow both governments to communicate at the highest levels and with one voice on issues of long-term and strategic importance to ensure bilateral economic stability and prosperity.

By definition, this is a complex relationship and managing complexity is daunting. It begins with speaking to the right people – at the right time – on the right issues – and in the right way.

The Strategic Economic Dialogue – as a new and leading institution in U.S.-China relations – has created these useful channels among policymakers in Washington and Beijing. Through this framework we have advanced the U.S.-China economic relationship by establishing new habits of bilateral cooperation and re-setting the foundation for stable and prosperous economic interactions.

We have embraced a broad agenda that covers cross-cutting economic and economically consequential issues, including regulatory transparency, energy conservation, environmental protection, food and product safety, as well as the important economic issues of exchange rate policy, market access, financial sector liberalization, and macroeconomic policy.

Our approach engages multiple and diverse government officials in both countries to facilitate more inclusive interactions. It breaks down classic bureaucratic stove-pipes that hinder effective communication and impede results. At the same time, we have continual, high-level interactions to set priorities and ensure their full implementation. I talk regularly on the phone with my counterpart Vice Premier Wu Yi, and our staffs are in constant contact.

That said – process is not result.

Dialogue among senior Chinese and American officials, while useful, needs to be more than talking for the sake of talking and can not give leaders "a pass" on issues of disagreement. It is about setting priorities, specifying consequences and fashioning practical solutions.

And that's what direct engagement does: it keeps the relationship on an even keel by lessening miscommunication and dispelling misperceptions so common in the history of the U.S.-China relationship.

Moreover, solidifying these habits of cooperation is critical to sustaining America's broader China policy, both at home and abroad. It further signals to China that we welcome the rise of a confident, peaceful and prosperous China, while also helping America to hedge against an uncertain Chinese future. A weak and insecure China is not in America's economic or security interests.

In addition to establishing new ways of working together, it is vitally important that our policies accelerate and deepen China's ongoing economic transition.

We applaud China's efforts to transition to an economy that is more market-oriented, less reliant on low-cost manufacturing exports, one that depends more on the skills and resourcefulness of the Chinese people and less on material inputs and natural resource consumption.

The pace of China's growth has clearly been remarkable, but it carries both opportunity and risk.

I liken it to some of America's fastest growing entrepreneurial companies, who see sales rise exponentially in a short time and then must earnestly work to build the infrastructure to sustain those sales. This is the challenge that China's leaders now face – to make the jump in strategy and policy needed for an economy that is no longer in the first stages of growth.

A major risk China faces is that its government won't act quickly enough to take the policy steps necessary to deal with the economic and social imbalances created by its growth model. Without strong policy underpinnings and implementation, China's economic performance becomes unsustainable. We are encouraging key reforms that will help China manage the blistering pace of its economic growth; these include financial market liberalization and a plan for rebalancing growth. China has proven to the world that it can grow fast, but can it grow differently and, ultimately, grow smarter?

Bold structural policies are needed to shift China's growth away from heavy industry, high energy use, and dependence on exports – towards greater reliance on domestic demand, greater production of services, and greater provision of material well-being to China's population.

As I have said before, this will be much easier, and the prospects for achieving sustained, balanced growth in China and in the world economy much greater, if the Chinese increase the pace of RMB appreciation in the short term and implement a fully market-determined currency in the medium term. Currency appreciation to date has not slowed the Chinese economy.

Accelerating the rate of appreciation and introduction of flexibility will help China deal with the imbalances that have grown in the economy and make monetary policy much more effective in responding to inflation.

We must also recognize that currency is not the only driver of China's economic imbalances. Even more fundamental and important are internal structural issues, such as why Chinese households save so much and consume so little. Rebalancing China's growth is necessary for China to grow without generating large external imbalances.

A key to China's success here will be its willingness to accelerate the pace of its market-based economic reforms. Going beyond its WTO commitments, resisting protectionist sentiment, and opening up its economy to greater international competition for goods and services will help rebalance the Chinese economy and spread prosperity more broadly among the Chinese people.

These reforms are – and will continue to be – resisted by increasingly influential Chinese businesses. In my judgment, the greatest risk to China's long-term economic security is that protectionists prevail, and Chinese reforms proceed too slowly.

And finally, we are also encouraging China to act responsibly as a global economic power. China is influencing capital and resource markets all over the world; its economic influence is being felt from Chicago, to Sao Paolo, to Kinshasa.

We welcome China into key international financial institutions and are giving China a greater voice in them as well. Increased participation will allow China to advance its interests in those institutions, but it is also important that Beijing recognize the responsibilities of greater participation.

China has become a major source of foreign aid for many of the poorest countries. We look forward to working with China to assure that foreign aid and lending practices promote sustainable development.

This new era in U.S.-China economic relations requires new and dynamic ways of doing business. We are meeting these challenges through the creation of the political space and the institutional capacity for long-term stability in our bilateral economic relations.

Signposts and Benchmarks

While dialogue and negotiations are important, they are far from sufficient to ensure that we keep the bilateral relationship future-oriented and on an even keel. The SED is both long-term and strategic, but tangible progress in the form of sign posts and benchmarks is critically important to demonstrating that we are making progress in achieving our long term objectives.

I believe that we are making progress and we are able to point to steps that are enhancing and transforming our economic relationship in mutually beneficial ways. Three brief examples illustrate my point: civil aviation, energy and the environment, and financial services.

In May, we announced a new air services agreement that will make it easier, cheaper, and more convenient to fly people and to ship goods across the Pacific. Not only will this agreement stimulate an estimated $5 billion in new business over the next several years, the new routes will double passenger traffic by 2012 and allow full air cargo services by 2011. Perhaps as early as April 2008, there will be the first non-stop flight between Atlanta and Shanghai, the first from America's southeast for a U.S. airline.

The benefits of the civil aviation accord are many, including more commerce, greater cultural exchanges, and enhanced understanding.

We have also collaborated with China on a series of policies to help promote energy conservation and environmental protection. Those specific agreements foster demand for the development and deployment of clean and efficient, next-generation energy technology. This, in turn, will create a future in which two of the largest economies in the world become examples of bilateral cooperation towards sustainable development.

The SED has made consistent strides to further develop China's capital markets. As a result of our deliberations, the New York Stock Exchange and NASDAQ will open offices in China. China has also removed a barrier to the entry of new foreign securities firms, and will expand the scope of business open to foreign-invested securities firms.

These actions do not only expand the opportunities for international financial services firms. By allowing greater financial flows, they will help China move more quickly to a fully market-determined exchange rate. Competitive and efficient capital markets are also key to balanced, sustainable and higher quality economic growth – a critical Chinese goal over the next two decades.

In addition to the areas of positive cooperation, our enhanced dialogue means we must confront problems frankly and honestly – and often rapidly. Recent and repeated reports of tainted food and product imports are causing fear and uncertainty in American consumers and harming the "Made in China" brand here in the United States.

The effectiveness with which China manages these safety issues will have long term implications for U.S.-China trade relations, the integration of China into the global trading system, and the sustainability of China's economic growth trajectory. We are actively working together to enhance the safety of products coming from China and to protect the American consumer. We also need to make sure that policymakers in both countries are focused on science-based safety decisions, not protectionism or retaliation.

Towards a New Future for Bilateral Economic Relations

President Bush and President Hu have set a positive agenda for strengthening our economic relationship. The SED is a core part of that agenda because it is long-term in its vision, comprehensive in its scope, and immediate in its ability to deal with the most sensitive bilateral economic tensions.

I congratulate the Chinese on the successful conclusion of their 17th Party Congress and related events. My colleagues and I look forward to developing constructive and productive relationships with the new members of Chinese leadership team. In his political report to the 17th Party Congress last week, President Hu emphasized the dual goals of continuing market reform and global integration, while simultaneously working to alleviate the negative domestic consequences of rapid economic growth.

Our next meeting of the SED in December will discuss a number of these objectives. Specifically, we will focus on the integrity of trade, balanced economic development, energy conservation, financial sector reform, environmental sustainability, and advancing bilateral investment.

The economic and geopolitical landscape of the 21st century will be greatly influenced by the way in which the United States and China work together. That emerging future requires a distinct vision and effective mechanisms to achieve it. The SED has allowed both the United States and China to begin to write the next chapter of our strategic economic relationship.

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